While virtually all assets are down this year, other than commodities, gold in particular—though not the top performer so far this year—certainly showed its "metal" as a safe haven amid market turmoil. The better-performing commodities all got a tailwind from the Russian invasion of Ukraine.
Gold is up $10 year-to-date, essentially flat, while the gold stocks are down (per XAU) around 7%. It is not unusual for gold stocks to fall with the broader market in a major sell-off, but they tend to recover soon and more rapidly than the rest of the market (1987, 2000, 2008). Bitcoin and other cryptocurrencies, which advocates said would also act as a safe haven, have lost more than half their value this year—some far more—clearly demonstrating that cryptos are a rank speculation, correlated more with high-risk tech stocks than anything else, and are certainly not a form of asset protection.
Not surprisingly, money has flowed into gold ETFs, $9.4 billion through the end of May.
Lara Could Win on Many Fronts
Lara Exploration Ltd. (LRA:TSX.V) has completed its previously announced financing, raising $4 million at $0.65 per unit; each unit consists of a share a half warrant, exercisable at $1 until 2025. Four insiders participated in the placement; chairman Miles Thompson now owns over 10%. It is positive that the company now has the cash to pursue ventures, and positive that insiders participated. Lara has many irons in the fire, but three assets that are potential company makers. We have discussed it all before.
- At Planalto, Capstone, which is earning into the property, has seen good results on the new ground Lara optioned, and has a large budget for ongoing exploration.
- On Liberdade, Lara and joint-venture partner Codelco won a court ruling against Vale. Although Vale is appealing, one can assume that Vale will work for some kind of settlement. The company is known to be keen on the Liderdade project.
- The Montaro phosphate project, where Lara just increased its interest from 33% to 70%, may take longer because of local opposition under the previous operators.
With a market cap of less than CA$40 million, even after today’s CA$0.10 increase in the stock price, Lara remains a solid buy. Any one of the three projects above is potentially worth the company’s market cap.
Will Vista Conclude a Good Deal?
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) reported results from the final exploration drilling program at Mt Todd. Drill holes consistently intersected mineralization, and the program demonstrated the potential north of the main Batman pit, and continuity from Batman to 3 km south of Quigleys, the other main deposit on the property. Vista said the targets developed represent a potential additional 1.8 to 3.5 million gold ounces.
These results may help the company achieve a partnership deal with another company to develop Mt Todd, which is clearly the main focus of the market now. If the company does not receive any bids considered satisfactory, it has said it will look to pursue other alternatives, including building a small mine to commence. This would be very much a second-best option. The deadline for submission of bids has not been announced publicly. The company has referred to a go-it-alone path more often recently, and the market weakness is not helping. But the risk-reward at this price remains positive.
Buy on weakness (the stock fell CA$0.09 in Canadian trading today so will likely open lower in the U.S. tomorrow).
Insiders Like Ares, and So Should We
Ares Capital Corp. (ARCC:NASDAQ) insiders have been buying the stock recently, including the chairman Michael Arougheti who bought over $5 million worth in the market. The president, Michael Smith, bought over $1 million last month. Like other Business Development Companies, Ares fell sharply in the past month on concerns about a recession in the U.S., but largely misplaced in Ares’ case, as we discussed before (Bulletin #825).
Trading below book, with an indicated yield of 9.6% (excluding special dividends), Ares is a strong buy.
Follow the “Leader” on Barrick?
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) was recommended by Jim Cramer on his “Mad Money” CNBC show. Though this normally would not want to make me buy a stock, since I was in first, I’m sticking with it!
Barrick is a strong buy at this level.
Don’t Buy Hamburger, When the Filet Is on Sale
Following the market decline, many stocks on our list are at good buying levels, but our “top buys” this week will focus on the best.
In addition to those above, top buys are Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE); Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE); Altius Minerals Corp. (ALS:TSX.V); Nestle SA (NESN:VX; NSRGY:OTC); Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX)); Orogen Royalties Inc. (OGN:TSX.V); Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE); Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE); and Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ).
Federal Reserve Members, Playing Catch Up are now expecting higher interest rates and inflation than previously, and lower GDP. In the latest FOMC “dot-plot” projections on the economy, members of the Federal Reserve’s rate-setting committee see rates going higher than they did at year-end, looking for a median of 3.5% next year and 3.25% by 2024. With inflation over 8% that is hardly sufficient to slay inflation, and is significantly below what even the Fed considers the “neutral” rate.
Its estimates for inflation, no longer “transitory,” have also increased—talk about being reactive to what’s already happened—but they still expect inflation in next year to range from 2.3% to 3% with only three members out of 12 forecasting more, with none over 4%.
For 2024, they all expect inflation under 3%. None is expecting a recession this year or next. In its statement accompanying the rate hike announcement, the Fed interestingly deleted the sentence that it ”expects” inflation to return to its 2% objective, only that it “remains committed” to that objective. It also deleted its expectation that the labor market would remain strong.
One other point: Fed members never acknowledge their role in creating the excess liquidity that led to inflation.
It is funny how the Fed can fight inflation, but had nothing to do with fueling it in the first place.
Two Junior Royalty Companies, Elemental Royalties Corp. (ELE:TSX.V; ELEMF:OTCMKTS) and Altus Strategies Plc. (ALTUF:OTCMKTS)—not to be consumed with Altius—have agreed to merge in ongoing consolidation of the space. Sandstorm recently agreed to acquire Nomad, while Elemental itself had been the object of a failed hostile takeover attempt by Gold Royalty Corp. (NYSEAMERICAN). We expect this consolidation to continue as companies seek size to guard against hostile takeovers.
One obvious participant would be Great Bear Royalties Corp. (GBRBF:OTCMKTS), which holds a royalty on the Great Bear property recently acquired by Kinross. GBRR has been inviting bids for the company. It is possible that it could merge with another royalty company to enable its shareholders to retain a meaningful interest in the Great Bear deposit which would otherwise be lost inside a large royalty company.
Separately, as discussed, Altius mentioned that its own gold royalties are not a fit for the company, and they could be spun out or form the basis of a larger royalty company formed via M&A.
All the junior royalty companies have been talking to each other since the Gold Royalties/Elemental hostile bid, and we expect more combinations to follow the Elemental/Altus merger.
Originally published on June 20, 2022.
Adrian Day, London-born and a graduate of the London School of Economics, is the editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Altius Minerals Corp., Barrick Gold Corp., Lara Exploration Ltd., Elemental Royalties Corp., Orogen Royalties Inc., Fortuna Silver Mines Inc., Pan American Silver Corp., Vista Gold Corp., and Osisko Gold Royalties Ltd. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management, which is unaffiliated with Adrian Day’s newsletter, hold shares of the following companies mentioned in this article: Altius Minerals Corp., Barrick Gold Corp., Lara Exploration Ltd., Elemental Royalties Corp., Fortuna Silver Mines Inc., Pan American Silver Corp., Vista Gold Corp., Orogen Royalties Inc., and Osisko Gold Royalties Ltd. I determined which companies would be included in this article based on my research and understanding of the sector.
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